Price Impact

Price impact refers to the change in the price of an asset caused by a trade.

In decentralised exchanges (DEXs) like Minswap, which utilise an Automated Market Maker (AMM) model, trades do not occur between two parties directly but against liquidity pools. When you trade a large quantity of an asset, it can cause the price to shift; this is known as price impact.

Several factors, including the size of your trade relative to the liquidity in the pool, influence the magnitude of price impact. If you’re trading a large volume compared to the available liquidity, the price impact will be more significant, meaning the asset price will rise or fall in response to your trade.

Significance of Price Impact on Trading

Price impact is crucial because it directly affects the value of your trade.

Even modest trades can significantly alter the price in low-liquidity pools, resulting in higher buyer costs or lower seller proceeds.

Here’s why it matters:

• Cost Efficiency: A high price impact can result in less favourable prices, meaning you may pay more or receive less than expected.

• Market Volatility: In volatile markets, price impact can exacerbate price fluctuations, leading to unpredictable outcomes.

• Slippage Tolerance: On Minswap and other DEXs, traders can set a “slippage tolerance,” which determines the maximum price change they will accept for their trade. Price impact directly affects this tolerance, and understanding it helps users adjust settings to avoid unexpected losses.

How to Manage Price Impact on Minswap

• Check Liquidity Levels: Before making large trades, evaluate the liquidity of the asset pair you’re trading. High liquidity pools are less susceptible to price impact.

• Minswap pools orders by highest TVL

• Pools on Minswap with liquidity shown as Total Value Locked (TVL) in the millions of ADA.

• Use Limit Orders: Minswap offers features like limit orders, which allow traders to set a specific price for their trades, mitigating the risk of a high price impact.

• Monitor Slippage: Adjust slippage tolerance settings to balance avoiding failed transactions and minimising adverse price changes.

Understanding the price impact on Minswap is essential for making informed trading decisions, as it can significantly affect the profitability of your trades.

By managing trade sizes, liquidity, and slippage tolerance, traders can minimise the negative effects of price impact and optimise their trading outcomes.